Bouncing off the bottom

Data don't show economy getting much better

WASHINGTON (CBS.MW) -- Before things can start getting better, they have to stop getting worse.

The U.S. economy isn't getting any worse, but it's not getting a lot better, either.

The big rally in stocks and rising bond yields in the past few weeks have been based on the simple idea that the economy isn't going to fall into another recession, as so many had feared.

The next leg will require something more. If the rally is to pass from a relief rally to a real bull market, we'll need actual, sustainable economic growth.

Economists are still divided about how close the economy is to that standard. Some say the recovery is still weak; others say the economy has emerged from its soft patch.

"These are better days," said Bob DiClemente, economist at Salomon Smith Barney. "Sluggish growth is more likely to give way to healthy expansion, barring a sustained intensification of geopolitical concerns."

We have seen better numbers, agreed Joe Abate, economist at Lehman Brothers. "But we haven't seen an upward trajectory."

The economic data in the coming week are as big as they get, but they probably won't settle the matter to anyone's satisfaction. The numbers will probably suggest that, while the economy isn't getting any worse, it isn't getting much better, either.

Investors and economists will be focused on two reports that will begin to paint a clearer picture of where the economy was in November and where it's going in December and January: the Institute for Supply Management survey on Monday and the jobs report on Friday.

ISM

The ISM index is the most accurate and timely indicator of the factory sector. The index has fallen four months in a row, sinking below the key 50 percent mark that divides expansion from contraction.

The ISM should jump to about 50.7 percent in November from 48.5 percent in October, according to the consensus estimate of economists surveyed by CBS.MarketWatch.com. See Economic Calendar.

The ISM is a diffusion index, which measures the breadth of activity, not its depth. It tries to find out not how strong the economy is, but how widespread among companies and industries the strength is.

Companies are asked if business is getting better or worse. The index is derived by adding the percentage of "better" responses and half of the "about the same" responses.

"Manufacturing looks like it's turned the corner," Abate said. "It's no longer contracting." The regional manufacturing surveys from the Fed banks in New York and Philadelphia, as well as the Chicago purchasing managers report, all flashed signs of growth in the factory sector.

"It is too soon to declare an end to the downturn in manufacturing," Abate said. An ISM reading of 50.5 percent isn't a boom.

Economists forecast significant gains in the forward-looking new orders index and in the production index, which is more of current indicator. In October, new orders rose to 50.9 percent from 50.2 percent, while production fell to 49.3 percent from 50.9 percent.

Salomon Smith's DiClemente sees both new orders and production rising to about 56.5 percent in November.

Although the factory sector is a small and steadily shrinking part of the economy, it's health is vital to the rest of us. The recession was led by a sharp pullback in investment for capital goods and spread to other sectors, such as retail and travel. Weakness in services, in turn, can depress spending on capital goods, like computers and aircraft.

Jobs

The week's other big release comes on Friday when the Labor Department reports on November's jobs.

Economists are looking for modest gains in nonfarm payrolls of about 40,000 in November following losses totaling 18,000 in September and October. That's good news, but it's not great.

"It'll be a soft employment report over all, a sign that the labor market continues to lag the rest of the economy," said Abate.

Because of steady population growth, firms need to create about 150,000 new jobs every month just to keep the unemployment rate from rising. It's been two full years since that many jobs were added in any month. So far in 2002, just 5,000 jobs have been created.

Economists figure the jobless rate rose to 5.8 percent in November from 5.7 percent in October.

Weekly claims for jobless benefits have been falling over the past two months, which means that firms are slowing the pace of their layoffs. Continuing claims for jobless benefits, on the other hand, have been stubbornly high. The number of workers collecting benefits is nearly double what it was before the recession began.

Other indicators, like the help-wanted index and consumers' assessment of job prospects, haven't improved at all. "This implies less job loss but not much new hiring," said Ed McKelvey, economist at Goldman Sachs.

The rest

Other important data to be released in the coming week include November auto sales on Tuesday (12.9 million annualized units expected vs. 12.5 million in October), October construction spending (up 0.1 percent vs. up 0.6 percent in September) and third-quarter productivity (up 4.8 percent vs. the preliminary estimate of 4.0 percent).

The four-week average for first-time jobless claims is expected to fall from 386,000 to about 381,000.

Rex
Nutting

Rex Nutting is a columnist and MarketWatch's international commentary editor, based in Washington. Follow him on Twitter @RexNutting.

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